Archives For November 2016

The Tax Cuts are Coming!

November 22, 2016

The tax cuts are coming – we hope. Much work and negotiation remains before any of the desired tax cuts shown below become reality. Regardless of which plan is enacted, it should stimulate personal spending, business, and the economy.

tax-cuts

Treasury yields have soared following the surprising election of Donald Trump as President of the United States.  Theories abound regarding the causes and consequences of the move, but as always it is good practice to step back and take a look at the big picture.

Veteran technical analyst Louise Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our attention to a few points.  First, according to Ms. Yamada, is that interest rates are most likely to only go up from here.  Yamada refers to an apparent “bottoming formation” that has been forming over the last several years.

On the 10-year Treasury note, a move above 3% would confirm her assessment because that’s the “level at which we can definitively say that rates have reversed”, Yamada states.  Yamada predicts that higher rates will boost equity prices in the near term, as in past cycles.  However, she will be watching the roughly 5% level where “you’ll start having problems.”  10-year Treasury notes finished this past week at 2.34%, so we’re a long way away from her “danger zone”.

200-years-of-us-interest-rates

Sleep On It

November 14, 2016

One interesting aspect of stock market trading is the “Wild West” — the so-called “after-hours” or overnight market.  After-hours sessions almost always have less liquidity and far fewer participants than the day session, which means prices spike up and down much more violently, orders receive poor executions (“fills”), and overall trading can be more costly.

Late on Tuesday evening, when the presidential election began to tilt in favor of Donald Trump, the bottom started falling out of the overnight market.  At one point, Dow futures had plunged over -800 points and the S&P lost -5.7% as panicked investors sold.  Selling begets selling when “stops” are hit, triggering further selling.

Paul Krugman, an economist at the New York Times, aghast at the thought of a President Trump, tweeted when the markets were falling “If the question is when markets will recover, a first-pass answer is never….we are very probably looking at a global recession, with no end in sight.”  His hyperbole was completely overblown, of course, as by market open almost all of the overnight carnage had disappeared.  Investors who sold in the after-hours market missed out on the recovery rally that took place that morning and continued the rest of the week.

Bespoke Investment Group used the opportunity to remind investors in a blog post that “The best advice anyone could ever receive in their formative years is that whenever an important and emotional decision needs to be made, it often helps to ‘sleep on it.’”  Marketwatch.com added another timeless piece of wisdom: “Teenagers and investors alike should be reminded that nothing good ever happens in the middle of the night!”

sleep-on-it

Presidential Predictor

November 7, 2016

Can the financial markets give a clue as to whether the incumbent or challenger has the better chance of winning a Presidential election? The answer is: probably!

Financial blog Zero Hedge published a study this week that showed that market performance in the 3 months leading up to a Presidential Election has displayed “an uncanny ability to forecast who will win the White House”. Since 1928 there have been 22 elections.  In 14 of them, the S&P 500 index was up during the 3 months prior to the election. The incumbent won in 12 of those 14 instances. Conversely, in 7 of the 8 elections where the S&P 500 was down in the 3 months prior to the election, the incumbent party lost.

The market has thus been correct 86.4% of the time in forecasting the election. With the S&P 500 down about -4% in the last 3 months, this measure says the incumbents – the Democrats – will lose.

But we’ll just have to wait to see.

sp-elections

Everyone is probably aware that we have historically low interest rates. The low rate environment affects not only what you pay for a new mortgage or car loan, but also affects the returns provided by bonds. Most 401(k) investors have a portion of their portfolio invested either in bonds, or target date funds which includes bonds as part of the portfolio. Those investments have done well over the last few years as I’ll explain below.

The reason we have low rates worldwide is the result actions by Central Banks – in the US, it is known as the Federal Reserve (Fed). In an effort to stimulate the economy, the Fed lowered rates to encourage borrowing and growth. The Central Bank in many other developed countries, have lowered their rates so low that they now pay a negative rate of interest on the bonds issued by their government.

The Fed raises interest rates from time-to-time to curb inflation and prevent runaway inflation. It has been a frequent news item that the Fed has been considering raising interest rates for some time now. Many feel that that won’t happen in November, but could well happen in December.

The reason that bonds have been good investments over the last several years is that the value of bonds and interest rates have an inverse relationship. In other words, when interest rates go down, the value of bonds typically goes up. So, as interest rates have fallen to record lows over the last several years, the value of bonds in your 401(k) have gone up – and nicely!

Conversely, when interest rates go up, the value of bonds typically go down. So the gains you have achieved through the rising value of bonds over the last several years could well disappear over the next several weeks or months as interest rates are increased.

Bonds are commonly thought of as being safer than investing in stocks. While it’s true that bonds have less volatility than the stock market, one shouldn’t think that they can’t lose money by having bonds in their portfolio.

A poll by Wells Fargo and Gallup reveals that most investors do not understand the impact of rising interest rates.  http://www.gallup.com/poll/183812/investors-anxious-hopeful-interest-rates.aspx.  Take a look at the chart below and see for yourself how bond prices can fall and the effect that can have on your portfolio.

bond-drawdowns

Bonds are not immune to loss. You should review your 401(k) and determine the risk of having bonds as part of your portfolio. A bond measurement known as duration provides an indication of how a rise in interest rates will affect the value of a bond holding. If you are not familiar with these concepts, I would encourage you to visit with a financial advisor.

Many aspire to have wealth. But sudden wealth has positive as well as negative aspects. Here is an interesting article of the negative aspects of sudden wealth.

http://www.bbc.com/capital/story/20161014-loneliness-often-follows-sudden-wealth